May to July Market & Economy Update

Hello and welcome to your May to July Market Update!

Firstly, apologies for the delay in sending through the recent market updates. My wife and I recently welcomed our first child, so it has been a very exciting and busy few months for our family.

The past three months have been another interesting period for investors. Despite ongoing concerns around inflation, interest rates, the conflict in the Middle East and high share prices, investment markets have remained surprisingly resilient.

May In Australia, the Reserve Bank increased the cash rate again in May to 4.35%, its third increase for the year. Inflation remained higher than desired, while elevated energy prices following the conflict with Iran added another potential source of price pressure. The Reserve Bank remained focused on bringing inflation back under control, even if that meant some additional pressure on households and the economy.

The Federal Budget was also a major focus. It included some cost of living support and measures aimed at improving productivity, but also significant changes to the taxation of future property investments. Changes to negative gearing and capital gains tax from 2027 could make investment property somewhat less attractive compared with shares and superannuation. Please see our last update for more information.

Global markets continued to deal with higher oil prices and rising bond yields during May. Despite this, sharemarkets remained relatively resilient. This was another reminder that negative headlines do not automatically lead to poor investment returns, particularly when company profits and economic growth remain reasonably healthy.

June June brought some relief when the Reserve Bank left interest rates unchanged at 4.35%. However, it made clear that inflation was still too high and further increases remained possible.

The Australian housing market also began showing clearer signs of slowing. Higher mortgage rates, weaker confidence and the upcoming tax changes for property investors started weighing on demand. Sydney and Melbourne prices softened, while growth in Brisbane, Adelaide and Perth also slowed. Australia still has a shortage of housing, which should provide some support to prices and rents, but the rapid growth of recent years appears to be losing momentum.

Sharemarkets, however, continued to hold up well. Economic activity remained reasonable, company profits were growing and investment in artificial intelligence continued to support technology companies. This helped markets look through many of the geopolitical and economic concerns that dominated the headlines.

July

By July, investors could look back on another strong financial year despite everything markets had faced. Global shares returned around 15% in Australian dollar terms over the year, while Australian shares returned around 6%.

One reason markets held up was that the oil shock proved less damaging than initially feared. Oil had surged to around US$120 a barrel following the disruption to global energy supply, but later fell significantly as reserves were used and hopes of a peace agreement improved. Tensions increased again later in July, however, reminding investors that energy supply and the Middle East remain important risks.

Closer to home, cost of living pressures remained a concern. Wages have struggled to keep pace with inflation, housing affordability remains difficult and Australia's weak productivity growth continues to limit improvements in living standards. These are longer term challenges without a quick solution.

What it meant for investors

The past three months were a good example of why it can be difficult to invest based on headlines. There were plenty of reasons to be cautious, including war, higher oil prices, rising interest rates and concerns around housing. Yet sharemarkets remained resilient and diversified investors generally continued to make progress.

It reinforces the importance of staying invested, remaining diversified and avoiding major changes based on short term events.

What to expect in the months ahead

Shares - The longer term outlook remains reasonably positive, supported by company profits and continued investment in areas such as technology and AI. However, after several years of strong returns, markets are not cheap and another period of volatility or a correction would not be unusual.

Interest rates and the economy - Inflation remains the main issue in Australia. By the end of July, the Reserve Bank was still leaving the door open to further rate increases if inflation remained too high. Higher rates are likely to continue putting pressure on households and property, but controlling inflation remains important for the longer term health of the economy.

Global events - The Middle East and energy prices remain key risks. A sustained rise in oil prices could push inflation higher and slow economic growth. Investors are also watching whether the enormous amount of investment flowing into artificial intelligence continues to translate into stronger company profits.

For most long term investors, the key message remains the same: there will always be reasons to worry. Markets rarely move in a straight line, but history shows that reacting to every piece of bad news can often do more harm than good. Staying diversified, sticking to your plan and focusing on your long term goals generally leads to better outcomes.

This update is general in nature and does not take your personal situation into account. If you would like to chat about how these trends relate to your own plan, I am always here to help.

If you have any questions or concerns, please reach out at any time.

Warmest regards Josh